Challenging the Old Ways of Music Royalties in the Digital Age: Good or Bad?

By Matthew J. Sullivan

The rise of the internet and the digital age have drastically changed many industries.

One of the best examples of this is the music industry, where almost every aspect of the business has had to adapt to new digital market trends. Recently, there was a case that was settled between the estate of Rick Nelson and Sony Music Entertainment. The claim arose from a challenge to how royalties are handled with regards to digital international distribution, resulting in a settlement that is being regarded as favorable to artists.

The question is: are these digital-era changes good for the music business? 

A royalty is a payment to the owner of a copyright, usually an artist, in a musical composition by a record company for the use of the composition. This is usually negotiated between the label, the artist and the artist’s agent or manager as a provision in the recording contract.[1] According to the American Society of Composers Authors and Publishers (“ASCAP”), a typical recording contract stipulates that the artist will receive 10-25% royalties from sales of their albums, with deductions factored in such as packaging costs, promotional costs, tour support costs, foreign royalty deductions, and other items.[2]

This line item for foreign royalty deductions, also known as “Intercompany charges,” was the crux of the complaint filed in the class-action lawsuit Nelson v. Sony Music Entertainment. This is a decades-old standard practice in the music industry. The justification for imposing these fees is because of increased logistical costs that the label incurs for distributing an artist’s music overseas.[3] The problem with this is that in the modern digital age, distribution of music is primarily through streaming. This has nominal costs and major labels are struggling to justify these deductions to artist royalties.

The estate of Rick Nelson alleged that because of this method, it was difficult to get an accounting of foreign sales and that Sony Music Entertainment was underreporting revenue.[4] Even though Sony Music Entertainment denied any wrong-doing, they ended up settling for $12.7 million.[5]

This challenge to traditional recording contracts has been perceived as a victory for artists.

This victory for artists can be considered progress, since music labels have been notorious for their “creative accounting” allowing them to maximize their profits at the expense of the artist’s earnings.[6] Another reason the digital era has been positive for the industry is that the internet has made it easier for music to reach a wider audience and for unknown or independent artists to have a platform without relying on labels. Encouraging new talent is good for business. However, there is still a demand for quality, professional production value in compositions. Someone still has to finance the recording sessions, mixing, and mastering. This is primarily the role of music labels, who are struggling to earn enough revenue in the digital era. As a result, many disputes have arisen over how royalties are to be handled now. Platforms like Amazon, iTunes, Spotify, Pandora and radio subscription services have sought to remedy this. Still, licensing issues are a major sticking point and there has yet to be an efficient resolution to this issue. Both labels and artists are struggling to earn money like they did in old days. [7]  

The digital age has been a friend to the artist. The need for talent scouts in a music label has been almost eliminated now that anyone can reach a wide audience through the internet. This is a good thing. Unfortunately, this has also made things bad for business as the music industry struggles to adapt.

Music is an important part of the American culture. Hopefully a balance can be found to benefit both the artist and the label as technology continues to progress.  

[1] California Code, Labor Code § 1700.4. “Talent agency”; “Artists”

[2] ASCAP Official Website:

[3]  Tatiana Cirisano, Sony Music Reaches $12.7M Settlement in Challenge to Decades-Old Contract Royalty Methods (9/11/2020)

[4] Bobby Owsinksi, Sony Music Faces Lawsuit for Under-Reporting Streaming Revenue (10/3/2018)

[5] Tatiana Cirisano, Sony Music Reaches $12.7M Settlement in Challenge to Decades-Old Contract Royalty Methods (9/11/2020)

[6] Bobby Owsinksi, Sony Music Faces Lawsuit for Under-Reporting Streaming Revenue (10/3/2018)

[7] Recording Radio and Film Connection and CASA Schools: Official Website

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